The Relationship between Income Inequalities and Economic Growth: New Evidence

Abstract

Purpose: The study aims to analyze the relationship between the pace of economic development expressed by the GDP index and the level of income inequalities measured by the Gini coefficient. Design/Methodology/Approach: The research hypothesis assumes that the level of income inequalities influences GDP growth. I hypothesize that this relationship is negative – a lower level of income inequalities favor the economic growth. I use the GDP per capita (per adult) year-to-year index to measure the pace of economic development. GDP index is a dependent variable in all estimated models. The explanatory variables are, GINI index, net national saving, public goods spending, country's dummy variables, year dummy variables. Findings: Using data from 43 countries covering the years 1990-2017, I prove that (1) higher income inequality is related to higher economic growth (but only on the level of the sample); (2) a level of savings affects the economic growth positively; (3) a higher level of spending on public goods affects GDP positively (on the level of the whole sample and in the group of more improve rished countries). Practical Implications The analysis confirms the positive relationship between income inequalities and the pace of economic development, but only at the whole sample level. Higher public spending positively affects economic growth. Savings accumulated by the citizens significantly affect economic growth, as a higher level of savings creates greater investment opportunities. Originality/Value: Inequalities are an inherent part of society and the economy. It is often presumed that if the level of income inequality is too high, it negatively affects the economy by lowering the development pace. Although the previous findings are somewhat mixed, I pose the research hypothesis assuming a low level of income inequality is linked to higher GDP growth.